Turnbull's NBN house of cards

The NBN strategic review raises more questions than answers. As it stands, the Coalition’s plan can collapse if any one of a multitude of assumptions proves false.

The Coalition’s National Broadband Network (NBN) review report released last week attempts to provide justification for the Coalition’s NBN plan but contains more holes than swiss cheese.

Two weeks ago the Minister for Communications Malcolm Turnbull advised Australians not to believe reports written by review teams hand-picked by politicians. He is quite correct in his advice. Any NBN review designed to bolster a particular political agenda is worthless.

What we do know is that the Coalition’s ADSL, Fibre-to-the-node (FTTN), Fibre-to-the-basement (FTTB) and Hybrid Fibre Coaxial (HFC) (multi-technology) NBN approach will cost a lot more than what was promised pre-election. And the delivery timetable doesn't look that great either. The eventual cost to upgrade to Fibre-to-the-Premises (FTTP) if the Coalition’s approach is implemented will more than treble from the cost of Labor’s approach if it is seen through to project completion.

Turnbull's defence

Turnbull was told this last April when the Coalition’s NBN plan was first announced and the communications minister has been reminded many times over the past year by experts not aligned with one political party or the other.

The NBN review report was always designed to provide a smokescreen for Turnbull’s backflips and somersaults but the stench associated with the NBN review report is spreading rapidly.

Turnbull toldFairfax that he didn't "feel any shame" about the government's inaccurate pre-election forecasts.

"They were (cost) estimates done in the best of good faith from opposition, and as far as the 2016 target is concerned, I'm very disappointed that the company is not going to be able to do that,” he said.

Turnbull recently stated that Labor wasted $20 billion on the NBN which should have cost $15 to $20 billion "had you approached it the right way from the start".

The right way according to Turnbull will now cost closer to $42 billion. But like a house of cards the Coalition’s NBN plan can collapse if any one of a multitude of assumptions made proves false.

This will not be known until July 1 2014 until the High Court, sitting as the Court of Disputed Returns, decides whether the 2013 Western Australian senate election results should stand or whether another election will be held in Western Australia.

Currently the senate composition stands at the Coalition 33 seats, Labor / Greens 35 seats, Palmer United Party 2 seats, and six individual seats held by minor parties.

If the Western Australian senate election is held again it's possible that Labor and the Greens could pick up the 5th and 6th seats which would mean the senate composition would be Coalition 33 seats, Labor / Greens 36 seats, Palmer United Party 2 seats, with five individual seats held by minor parties.

The Coalition will need to win control of the senate because NBN legislation may need to be altered to permit the Coalition’s multi-technology access network environment, especially as there will be contrary views on the interpretation of the current NBN legislation regarding cherry picking and wholesale access to FTTB and HFC networks owned by companies other than NBN Co.

If the Coalition does not gain Senate support to change current NBN legislation then it's likely there could be significant delays while matters move to the High Court for clarification. There is a strong chance that one or more companies will realise that the Coalition's multi-technology, multi-wholesale network approach is inherently anti-competitive and will cost more than the ubiquitous FTTP network that is owned and operated by NBN Co.

Competition complications

It could be argued that existing NBN legislation does not need to be changed if multi-technology networks become available to all retail providers through wholesale arrangements.

But what happens if Telstra (copper and HFC), Optus (HFC) and TPG (FTTB announced) put submissions to the Australian Competition and Consumer Comission (ACCC) to argue for cherry picking and wholesale access charges that are higher than the NBN Co wholesale access charges?

Companies could take the opportunity to build a considerable margin into wholesale access to their networks. The ACCC chairman Rod Sims announced that the recently finalised Special Access Undertaking accommodates variations to take into account “any new directions from the government”, which could mean an increase in access costs to consumers.

It took the ACCC ten years and countless trips to court to achieve a reasonable level of compliance by Telstra for the provision of wholesale access to copper.

What guarantee will there be that all retail providers will be provided with reasonable wholesale access and performance guarantees? The ACCC is still not able to provide details of internet connections speeds, performance and quality of service provided over Australian access networks.

2016 federal election

NBN Co plans to commence the multi-technology rollout during the second half of 2015 which means that it will only have about 12-18 months before the next federal election. During that time the rollout might reach five to ten per cent of premises – discounting any inclusion of HFC figures because the HFC will need to be upgraded and transformed into a wholesale network.

If the Coalition loses the next election and Labor goes to the election with a plan to stop the multi-technology rollout the start-up costs, which could be as high as $10 billion, will be lost.

The Coalition would argue that the $10 billion is being wasted by Labor but this would be wrong because the Coalition must accept that there is a rollout occurring now and the decision to change direction has risks associated with it. The risk of failure at the next election is a risk that must be considered, especially if the latest polling is to be believed.

And what about any agreements and contracts signed by NBN Co before the next election? Will the contracts be reversible or will the Coalition put in place contracts that will be too expensive to renegotiate after the 2016 election?

Ultimately the decision to change direction with the NBN rollout is a political decision but there are governance requirements that must be met by the NBN Co board. After the next election it would not be unreasonable for an incoming Labor government to hold a royal commission into decisions made by the NBN Co board which could lead to billions being wasted.

Agreements and contracts

New agreements will be needed with Telstra, Optus and many other companies. Renegotiating existing agreements will increase costs because companies would be negligent if they did not look to optimise return on any new agreements.

Existing infrastructure contractors will take this opportunity to put their hands out for considerable increases in future contracts and who would blame them for doing this? The Coalition needs their support to change direction and build the NBN. Contractors are well aware the Coalition has no stomach for delays that might affect the rollout and provide ammunition to Labor at the next election.

By utilising HFC, NBN Co will be negotiating with Telstra and Optus who will be looking for an unexpected, yet welcome profit. This profit will balloon from any network operation, maintenance and upgrade agreements.

HFC

NBN Co’s non-executive director Simon Hackett wrote a spirited defence of HFC on his blog in response to ongoing criticism in the media of the HFC networks.

Hackett’s argument that the HFC can be rebuilt to cover black-spots, have traffic class management, performance and quality of service and congestion control retrofitted and upgraded to DOCSIS 3.1 in the next 3 to 5 years reads like the NBN review report – yet more assumptions and unknown costs that consumers will have to pay and no guarantee that NBN Co will actually do anything.

The argument the HFC network can be rebuilt to fill in black-spots adds a cost that NBN Co will look to put off as long as possible. This is because it will take time to identify where the black-spots are, prioritise and identify if it is economic for the work to go ahead. And the work crews will need to be trained, provisioned and allocated to do the work.

There will still be a need to rollout new fibre to multi-dwelling units which are not likely to be connected to HFC networks.

Hackett also argues that HFC and FTTP provide shared connections into premises and both can provide equivalent connection performance but he then provides a caveat that traffic class management, performance and quality of service and congestion control are not currently implemented on the HFC networks and will need to be retrofitted. There is no guarantee that this will be done because it has not been identified by NBN Co at this point. If it is done then yet another unknown cost that needs to be added to the Coalition plan.

FTTP GPON operating with 1 Gbps download speed is available now and NBN Co has previously announced that gigabit connection speeds will be available in January 2014 so why would anyone want to bear the risk of utilising HFC and introducing, as yet unknown. costs to rebuild, retrofit and upgrade?

FTTN

Last week the government and NBN Co representatives at the Senate Estimates Committee admitted that neither had spoken to Telstra about the state of the copper network. This was an amazing admission at a time when NBN Co was about to release a review report recommending FTTN and other technologies be adopted.

This week's proceedings at the Committee have further galvanised the enormity of NBN Co's copper gamble. As Telstra's government affairs director James Shaw said on Tuesday, Telstra does not know the full state of the copper and is unlikely to conduct an audit before FTTN deployment.

The NBN review report was apparently based on data about copper networks other than Australia’s copper network. The risk associated with the decision to utilise foreign copper network data is considerable and should give rise to concern because Australia’s copper network is unlike the international copper networks that have apparently been the source of data used in the NBN review report.

The copper network was at the heart of the decision to implement FTTP. In 2008, the Labor constituted review panel identified the risks associated with the copper network were unacceptably high, knowing that any inclusion of the copper network in the future NBN would mean Telstra remains central to the NBN.

The Coalition’s NBN plan places several telcos in an enviable position where they will be able to take a clip from any retail user that access their network and also provides for considerable profits for retrofits, performance upgrades and network operation.

What exactly is the NBN Co providing now?

The NBN review report is quite remarkable because we’re told $42 billion is needed to build a multi-technology NBN but the number of assumptions makes the report look like the lunar surface. What will the money be spent on, what will be provided and how much will the copper and HFC really cost?

NBN Co is now committed to providing 25 Mbps sometime after 2016, 50 Mbps sometime later and 100 Mbps at some point after that if you’re lucky and your stars are in alignment.

The NBN review report remains vague regarding the provision of traffic class management, capacity, congestion and backhaul. NBN Co must provide clear statements about the multi-technology network design criteria, what will be achieved and when.

The NBN Co board has been asked to build an NBN, and if this latest review report is a guide, NBN Co has a long way to go before anyone will have a firm idea of what they’re doing or why.

Mark Gregory is a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University

IMPORTANT: This information is general financial product advice only and you should consider the relevant product disclosure statement (PDS) or seek professional advice before making any investment decision. Product disclosure statements for financial products offered through InvestSMART can be downloaded from this website or obtained by contacting 1300 880 160. You should consider the product disclosure statement before making a decision about a product. All indications of performance returns are historical and cannot be relied upon as an indicator for future performance.